BAKU, Azerbaijan, October 3. The war between the U.S. and Israel against Iran has significantly disrupted the oil market, causing sharp price fluctuations and forcing market participants to quickly adjust their positions and risk management strategies.
This was stated in a report by the Oxford Institute for Energy Studies (OIES) titled “Shifting Oil Market Positioning During the Strait of Hormuz Crisis.”
Disruptions to oil flows through the Strait of Hormuz were particularly significant, affecting not only the availability and destinations of physical oil supplies but also the functioning of the oil derivatives market.
According to the report, open interest in oil futures fell sharply as financial speculators reduced their positions amid significant price volatility, higher margin requirements, and growing pressure to reduce positions due to tighter value-at-risk (VaR) limits.
"At the same time, oil options have become a more sought-after instrument for expressing and managing risks associated with market movements during overnight trading. The use of short-term option contracts has increased significantly.
Differences in the behavior of producers, trading companies, refiners, and consumers (PMPU), as well as swap dealers, have led to differing positioning dynamics in the Brent and WTI markets.
PMPU’s net position in Brent became significantly shorter during the first three months of the war, after which it began to shift in the opposite direction.
“This trend generally coincided with changes in crude oil trade flows, as refiners sought to offset supply disruptions caused by the closure of the Strait of Hormuz, including by increasing imports from the U.S. and other alternative sources,” the report states.
At the same time, the PMPU’s net position in WTI remained relatively positive. According to OIES estimates, this may partly reflect the release of oil from the U.S. Strategic Petroleum Reserve (SPR) and the associated hedging of future obligations to return the oil.
The report also notes a significant difference in the structure of positions held by money managers across various segments of the oil market.
"For example, the activities of systemic participants using trend-following strategies were focused primarily on Brent, while positions in WTI and petroleum products were largely established by discretionary traders.
Initially, discretionary positions were concentrated primarily on Brent, but subsequently shifted toward refined products as the consequences of disruptions in refined product supplies from the Gulf countries, attacks on Russian refineries, and declines in crude oil imports and refining volumes in China became more apparent," the OIES report states.
A significant portion of PMPU activity in the crude oil market is linked to physical market participants, including trading companies that move oil between different destinations and over time.
“As physical trade flows change, these companies adjust their derivative positions to manage price and basis risks associated with the purchase, transportation, and delivery of oil,” the document notes.
The OIES believes that significant disruptions in oil flows from the Middle East following the outbreak of the war help explain the unusual dynamics of PMPU positions.
According to the report, PMPU’s net position in Brent fell sharply after the war began, reaching approximately minus 600,000 lots by mid-May, which is about 250,000 lots more in short positions compared to early March.
"Then the trend reversed: starting in late May, PMPU’s net position began to recover, and from late July onward, it gradually became less short.
Notably, this trend mirrored changes in U.S. crude oil export volumes, which rose from approximately four million barrels per day to about 5.5 million barrels per day by mid-May, and then fell to about 3.5 million barrels per day by the end of July," the report states.
The institute also notes that the situation in Asia may have further reinforced this trend.
“During the initial disruptions, some Asian crude oil buyers changed their pricing mechanism for U.S. oil purchases, switching from Dubai to Brent, as the Dubai benchmark was experiencing an unusual and volatile period,” the report states.
